Questions and Answers About the HCFC Allowance Allocation System

Why is there a cap on production and import of HCFCs?

HCFCs are substances the deplete the ozone layer. In 1992, the Parties to the
Montreal Protocol on Substances that Deplete the Ozone Layer (Protocol) established a limit (cap) on the combined production and import of hydrochlorofluorocarbons (HCFCs) for industrialized countries; this went into effect in 1996. A stepwise phaseout schedule was also agreed to: a 35% reduction from the cap in 2004; a
75% reduction in 2010 (adjusted in Sept 2007 from 65%); a 90% reduction in
2015; a 99.5% reduction in 2020; and a total phaseout in 2030. The
Parties to the Protocol decided in 1999 to establish a separate cap on
production to take effect in 2004 and follow the same schedule as the
consumption phaseout.

Why are certain HCFCs singled out for accelerated phaseout in the U.S.
and what is that schedule?

To ensure that the U.S. achieves the required reductions in production and
consumption of HCFCs that were agreed to under the Protocol, EPA developed a marketable allowance system. Such a system was selected for the chlorofluorocarbon (CFC) phaseout and proved highly successful. It was the most economically efficient system of all the methods considered, being market-based and relatively simple to administer. The allowance system retains the flexibility for industry to continue to operate efficiently, while ensuring the U.S. does not violate the parameters agreed to as a Party to the Protocol.

How does the HCFC allowance system work?

Each producer or importer is allocated allowances (one allowance per each kilogram of HCFC), based on historical production and import activity. When a company then produces or imports each type of HCFC,
it
expends an allowance for each kilogram of the HCFC produced or imported. If a
producer expends allowances to make HCFCs, then exports those HCFCs, the
producer will receive allowances for the amount exported. The system is based on
the need to ultimately balance the global output of HCFCs.

Are the allowances allocated on a chemical-specific basis? Why?

Yes. To ensure compliance, EPA needs to know which specific chemicals were produced and imported. Additionally, the U.S. must
annually report production, imports, and exports to the
Parties to the Protocol on a chemical-specific basis.

Why does EPA allocate both production AND consumption allowances?

Because the Montreal Protocol has instituted both a consumption and production cap, both types of allowances must be allocated and expended as appropriate. When we use the word "consumption", we are referring to the
Montreal Protocol formula: consumption = production + imports - exports. When we look at the consumption numbers, then, we are looking at all of the activities combined  what has been produced, what has been imported, and what has been exported. The production phaseout refers only to production. Therefore, allocations
are based on historical production, import, and export activity, respectively, as explained below.

Then which kind of allowances does someone need to expend for each activity?

The expending of allowances follows the process used in the CFC allowance system. To produce an HCFC before that HCFC's phaseout date, you would expend one production and one consumption allowance for each kilogram produced. To import, you would expend one consumption allowance for each kilogram
imported. For exports, you would receive back one consumption allowance per kilogram exported.

What is the baseline used by EPA to determine allocation of
HCFC-22, HCFC-141b, and HCFC-142b production and consumption allowances?

Each company was allocated both production and consumption allowances reflecting their year of highest reported HCFC consumption (on an ODP-weighted basis)
among the years 1994-1997. EPA determined that all reported HCFC consumption, using the highest of these five years for each company, would keep the U.S. under its Protocol cap
for the 2004-2009 reduction. EPA is continuing to use this
baseline for 2010-2014 but allows each person only a percent of
that baseline.

Why did EPA start issuing allowances for HCFC-123, HCFC-124,
HCFC-225ca, and HCFC-225cb? What baseline does EPA use for these
chemicals?

Considering the evolution in the HCFC market and
the September 2007 Montreal Adjustment of the cap from a 65 percent to a 75
percent reduction, EPA established and apportioned baselines for the 2010-2014
control periods for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb. These four
HCFCs are the only remaining HCFCs commonly used in the United States. To
establish the baseline, EPA used each company’s highest reported consumption and
production data reported for the 2005-2007 control periods.

What if I began producing or importing HCFCs after the baseline
years?

Under this allowance system, it is still possible for a company to transfer its production and consumption allowances to another company
after EPA approval. As explained below, it
is possible to import used HCFCs without using consumption allowances.

How could I trade allowances with other companies or between types of
HCFCs?

This marketable allowance system lets a person
trade one kilogram of an HCFC to another company, who would receive one kilogram
of that same type of HCFC. It also permits a trade within a company or between
companies, from one type of HCFC to another type. Each type of HCFC has a
different ozone depleting potential. When trades occur between chemicals, they must be weighted by
ODP. Thus, if a company wants to trade 100 kilograms of
HCFC-22 (with an ODP weight of 0.055) to another company that wants to use the
allowances as HCFC-123 (with an ODP weight of 0.02), the 100 kilograms of
HCFC-22 would equal 275 kilograms of HCFC-123. You would begin by multiplying
the kilograms of the HCFC you want to trade by the ODP of that HCFC. Then you
would divide that number by the ODP of the HCFC that you want to receive. That
would give you the number of kilograms that the trade represents on an
ODP-weighted basis.

The Clean Air Act requires that a trade of allowances result in a benefit to the environment. When it processes an inter-company transfer, EPA deducts an offset (0.1 percent of the trade) from the transferor's allowance balance. For inter-pollutant transfers, when EPA determines
that the convertor has sufficient unexpended allowances to cover the transfer, EPA also deducts an additional 0.1 percent of the quantity for the transfer.

Using my allowances, would I be able to import HCFCs from and export
HCFCs to any country?

In its November 1999 Meeting, the Parties to the
Montreal Protocol agreed to ban trade in HCFCs with Parties that have not ratified the
Copenhagen Amendments of 1992, beginning in 2004. The list of Parties that have
ratified the Copenhagen Amendments is available at the
UNEP site.

You must
first hold allowances to import virgin HCFC-22, HCFC-142b, HCFC-123,
HCFC-124, HCFC-225ca.
Second, the virgin HCFC-22 or HCFC-142b may only be used for the purpose of
servicing existing refrigeration and air conditioning equipment, with a few
limited exceptions. Third, you must comply with all recordkeeping and
reporting provisions. Reporting forms for
Class II substances are here.

Unlike importers, exporters do not need
allowances to export HCFC-22 or HCFC-142b in bulk, at least to developed
countries. However, starting January 1, 2010, HCFC-22 and HCFC-142b (and
blends containing those compounds) may only be exported to developed
countries if the HCFCs 1) are used, recovered, and recycled, 2) will be used
for transformation, or 3) will be used as a refrigerant in appliances
manufactured before January 1, 2010.

How do the phaseout and the allowance system affect the import of used
HCFCs?

Unlike virgin HCFCs, there are no Montreal Protocol restrictions on the quantity of used HCFCs
that may be imported. However, the U.S. has established a rigorous petition process, where a person must receive EPA approval before used HCFCs may be imported. While allowing trade in quantities of already existing used material can offset the need for new global production and help ease the transition to alternatives, the U.S. petition system ensures that the HCFCs were in fact used before being allowed as an import.
More information is on the Class II
used ODS imports page.